Shaw Communications is expected to earn more in fiscal 2017. This blue chip stock’s climbing cash flow will enable it to continue to pay generous, sustainable and growing monthly dividends. This should attract income-seeking investors, who will bid up your shares.

Calgary-based Shaw Communications (TSX—SJR.B) is expected to earn more money in fiscal 2017 (fiscal years start on September 1). It pays high, sustainable and growing monthly dividends. As a result, the company remains a buy for long-term share price gains as well as those generous dividends.

Earnings, balance sheet, cash flow can sustain generous dividend

Shaw has reported its earnings for the first quarter of fiscal 2017. In the three months to November 30, it generated operating income before restructuring costs and amortization of $539 million, or $1.11 a share. This was up by 4.7 per cent from $508 million, or $1.06 a share, a year earlier and on the same basis.

Shaw pays generous dividends. Its current dividend of $1.19 a share yields an attractive 4.3 per cent. The company holds cash of $289 million. That’s almost enough to pay dividends for the rest of the year.

In assessing whether a dividend is sustainable, we start by looking at a company’s balance sheet. Subtract the cash of $289 million from total debt of $5.660 billion and Shaw’s net debt is $5.371 billion. Divide this by cash flow of $1.550 billion over the latest four quarters and the net debt-to-cash-flow ratio is less than 3.5 times. This is above our standard comfort zone of two times or less. Even so, Shaw generates stable and predictable revenue and cash flow. It can manage a net-debt-to-cash-flow ratio of over two times. But the company is unlikely to take on much more debt.

We also look at whether a company generates enough excess cash flow to sustain its dividend. In the three months to November 30, Shaw’s cash flow of $414 was up by 19.3 per cent from cash flow of $347 million, a year earlier. This confirms its higher first-quarter earnings, after excluding one-time items.

What’s more is that the company’s cash flow exceeded its needs: investment of $301 million and dividend payments of $98 million. Excess cash flow of $15 million in the first quarter suggests that Shaw’s dividends are sustainable.

Shaw’s multiple is hefty

In fiscal 2017, Shaw is expected to earn $1.33 a share. This represents earnings per share growth of 3.1 per cent. Based on this estimate, the shares trade at a hefty 20.9 times. Then again, the company should regain its stride this year. We expect it to earn more over the long run.

The consensus recommendation of four analysts is ‘hold’ Shaw Communications. We disagree. You should buy this blue chip stock for long-term share price gains as well as generous and growing monthly dividends.

This is an edited version of an article that was originally published for subscribers in the January 27, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.